Indirect Taxes + Subsidies

Question 1

Define indirect taxes

Answer 1

taxes on the consumption of a good

Question 2

Define specific tax

Answer 2

fixed amount of tax per unit sold

Question 3

Define percentage tax

Answer 3

fixed percentage charged on selling of the good

Question 4

Indirect taxes effect on allocative efficiency (2)

Answer 4

economy with efficient allocation = creates allocative inefficiency + welfare loss

economy with inefficient allocation = improve allocative efficiency by removing source of allocative inefficiency

Question 5

Reasons for imposing indirect taxes (4)

Answer 5

collect revenue

discourage consumption of certain goods

redistribute wealth

correcting allocative inefficency

Question 6

Revenue as a reason for imposing indirect taxes (2)

Answer 6

source of revenue for government

lower PED = higher gov. revenue

Question 7

Discouraging consumption as a reason for imposing indirect taxes (2)

Answer 7

demerit goods heavily taxed to reduce consumption

low PED = small decrease QTY demanded

Question 8

Wealth distribution as a reason for imposing indirect taxes (2)

Answer 8

taxing on luxury goods

taxing goods which only high-income households can afford to lower their purchasing power

Question 9

Market impact due to indirect tax (4)

Answer 9

consumption decreases from Qe

equilibrium price increases - paid by consumers

consumer expenditure will decrease

firm revenue will decrease

Question 10

Define merit goods (2)

Answer 10

goods beneficial to individual + society as a whole

usually underprovided

Question 11

Define demerit goods (2)

Answer 11

goods harmful to individual + society as a whole

usually over-provided

Question 12

Define a subsidy (3)

Answer 12

assistance by government to individuals, firms, etc. of an economy

take form of direct cash or other forms (e.g low interest loans)

provision of goods/services by gov. below market price for low-income consumers

Question 13

Subsidy effect on resource allocation (2)

Answer 13

economy where resources allocated efficiently - introduces inefficiency + welfare loss

economy where resources allocated inefficiently - improve efficiency

Question 14

Purpose of subsidies (5)

Answer 14

increase producer revenue

make basic necessities more affordable

support growth of particular industry

encourage consumption/exports of particular goods/service

potentially improve resource allocation

Question 15

Impact of subsidies to consumers

Answer 15

consumers are better off due to fall in price + increase in QTY

Question 16

Impact of subsidies to producers (2)

Answer 16

better off receive higher price due to subsidy

produce larger quantity of goods

Question 17

Impact of subsidies to government (4)

Answer 17

pays subsidies which is a burden to budget

raises taxes

reduces expenditure in economy

can cause budget deficit

Question 18

Impact of subsidies on workers

Answer 18

firms likely to hire more workers to produce extra output

Question 19

Impact of subsidies on society (3)

Answer 19

society is worse off - overallocation of resources

both CS + PS increase

government spending is greater than gains in CS + PS

Question 20

Services provided directly by the government (5)

Answer 20

healthcare

public transport

education

rail/airline services

energy